Group is sec­ondbest in S& P 500 per­for­mance in 2017

Chicago Sun-Times - - MONEY - Adam Shell @ adamshell USA TO­DAY

Health care stocks are per­form­ing bet­ter this year than in­vestors might think, given the ran­corous de­bate over the Repub­li­can plan to re­peal and re­place Oba­macare.

Over­all, the 61 stocks in the Stan­dard & Poor’s 500 health care sec­tor — which in­clude hos­pi­tals, in­sur­ers, drug mak­ers, biotechs and med­i­cal de­vice mak­ers — have gained 8.9% in 2017 ver­sus a 6% rise for the broad stock- mar­ket gauge, mak­ing it this year’s sec­ond- best per­form­ing group be­hind tech­nol­ogy, S& P Dow Jones In­dices says. At the same time last year, the sec­tor was down 7.1%, com­pared with a 0.3% gain for the S& P 500.

So what’s in­ject­ing adren­a­line into the stocks?

Money­man­agers that run health care funds say the group is re­bound­ing from a poor 2016 after be­ing a mar­ket leader the five prior years. Since the en­act­ment of the Af­ford­able Care Act in March 2010, health care stocks have risen more than 133%, bet­ter than the S& P 500’ s 103% gain. The group ran into trou­ble last year when the stocks got too pricey. That made them vul­ner­a­ble to po­lit­i­cal at­tacks dur­ing the pres­i­den­tial cam­paign, when Demo­crat Hil­lary Clin­ton called out drug mak­ers for “out­ra­geous and un­jus­ti­fied pric­ing prac­tices” and Don­ald Trump made clear he planned to do away with the ACA.

Health care stocks are “play­ing a

lit­tle catch- up,” says Brad Sorensen, man­ag­ing di­rec­tor at Sch­wab Cen­ter for Fi­nan­cial Re­search.

But bounc­ing back from a bad year is only part of the story.

Ed­die Yoon, man­ager of Fi­delity Se­lect Health Care fund, says by the end of 2016, the hard- hit sec­tor was again cheap enough to at­tract buy­ers, with val­u­a­tions hit­ting a low rel­a­tive to the mar­ket not seen since the early 1990s. In­vestors de­ter­mined that fears of drug price con­trols and a lack of clar­ity re­gard­ing the new health re­form bill were overblown. In­vestors be­lieve the Repub­li­can­led Congress will be more friendly to the in­dus­try than Clin­ton would have been.

“The mar­ket,” says Yoon, “is re­al­iz­ing the pric­ing en­vi­ron­ment won’t be as dra­co­nian as feared.”

At the end of Fe­bru­ary, his port­fo­lio was filled with stocks he says have good growth prospects, such as biotech Am­gen, up nearly 16% this year; de­vice maker Bos­ton Sci­en­tific, up about 13%; and tech­nol­ogy so­lu­tions names such as Te­ladoc, up 41%.

“What­ever changes end up oc­cur­ring, you are still go­ing to have suf­fi­cient de­mand in place where these com­pa­nies are go­ing to pros­per,” says Mark Oelschlager, man­ager of Live Oak Health Sciences fund.

Changes, Yoon adds, won’t un­der­mine “key pil­lars of growth.”

Work­ing in health care’s long- term fa­vor, he ar­gues, is its tremen­dous in­no­va­tion, which cre­ates a fresh pipe­line of new drugs to treat ail­ments such as high choles­terol. An­other growth driver is de­mo­graph­ics, as ag­ing pop­u­la­tions mean greater de­mand for med­i­ca­tions, more vis­its to the hospi­tal and a greater reliance on life- sav­ing and life- en­hanc­ing surg­eries, such as heart by­passes and knee re­place­ments. U. S. health providers also will tap into growth from emerg­ing mid­dle classes around the globe.

The abil­ity of health care com­pa­nies to in­crease sales and earn­ings no mat­ter what the econ­omy is do­ing also makes them cov­eted, Oelschlager adds.

Sorensen re­cently up­graded the health care sec­tor to “out­per­form,” which re­flects a more up­beat out­look. A key rea­son is the ag­ing of the world’s pop­u­la­tion, which he dubs an “un­der­ly­ing tail­wind. As we get older and fat­ter we need more health care,” he says. “Peo­ple de­mand more drugs and more pro­ce­dures.”


Dr. Wil­liam A. McDade, above, looks over electronic med­i­cal records in the pre- op area at Univer­sity of Chicago-Med­i­cal Cen­ter.

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